Volume 24, No. 12

Materiality Matters: The FASB has issued two exposure drafts for comment, and they seem aimed squarely in the interest of just one constituent of the standard setting body: the preparer community. One proposal amends a FASB Concept Statement, which is a non-authoritative, cohesive framework which it tries to blend into its new authoritative standards. The other proposal is an actual update to the general disclosure standards in the Accounting Standards Codification – the repository for all U.S. generally accepted accounting principles. That proposed amendment would be authoritative, and would provide preparers with leeway in presenting disclosures in their financial statements, in addition to establishing materiality as a legal concept in the accounting literature. It would also specify that omitting immaterial information is not an accounting error.

In the two months since they were issued, the twin proposals have generated anger on the part of investors. Simply put: what’s in it for them? The reasons for the proposals – to “eliminate inconsistencies between the framework and the legal concept of materiality” in the Concept Statement proposal, and to “promote the appropriate use of discretion by reporting entities” in the standards codification proposal – do not address burning questions of the day for investors. The proposals have alarmed investor types and the financial press, because conceivably, the proposed changes could provide companies with more license to gerrymander unflattering disclosures under generally accepted accounting principles.

It’s a legitimate concern: there will always be those firms that view any accounting pronouncement as a chance to participate in a favorite blood sport, something to be gamed for the last bit of possible advantage, whether economically legitimate or not. While it’s possible that bad behaviors might be encouraged by a looser leash on disclosures, it’s also possible that the effort required to justify cutting disclosures might be more trouble than it is worth – and firms might not omit disclosures just to avoid the downsides of inadequate disclosure. Valeant provides a real-life example of the consequences of not disclosing information well enough.